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Home > Savings Rates & Info > IRAs > Roth IRA
Roth IRA
What is a Roth IRA? A Roth IRA is a tax-deferred retirement account that turns the traditional IRA formula on its head: although retirement contributions are taxed up front, withdrawals can be made completely tax-free once you reach age 59 1/2 and have had a Roth IRA for five years. For some people, paying taxes now to enjoy tax-free income later may actually make more financial sense in the long term. For one thing, the Roth IRA allows investors to effectively shelter more money for retirement. Although the annual contribution limit is the same for both traditional and Roth IRAs, because your Roth contribution is made with after-tax income, the full $5,000 (or $6,000 if you're age 50 or older) can compound substantially over the years — without incurring any future tax liability.
The amount you can contribute to a Roth IRA may be reduced or eliminated depending on your filing status and your adjusted gross income level.
Whether the Roth IRA is a better option really depends on your expectation of your future tax rate. In the past, retirees routinely moved into a lower tax bracket. However, with more people maintaining high levels of income even in retirement, it may make more sense to pay taxes on your contribution today, while you're still employed.
Although investors can certainly open both a Traditional and a Roth IRA, most financial advisers suggest that you convert your existing account to take full advantage of the Roth's long-term benefits. But before converting, consider these factors:
- You can only convert if your adjusted gross income is not more than $100,000 for the year the conversion occurs.
- More importantly, you'll have to pay taxes — which can be substantial depending on how much you've amassed in your current IRA — on all deductible contributions and earnings. To avoid being hit with penalties, you must pay these taxes with non-IRA money. In fact, tax experts caution that if you don't have other cash handy to pay the tax, you're probably better off with a Traditional IRA.
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